1982 EO CPE Text
E. DISCRETIONARY RELIEF UNDER IRC 7805(b)
AND REG. 1.9100-1
1. Introduction
The purpose of this topic is to discuss various aspects of discretionary relief
available to exempt organizations. The pertinent provisions that provide such relief
are IRC 7805(b) and Reg. 1.9100-1. IRC 7805(b) is used to determine the extent to
which any ruling will be applied without retroactive effect. Reg. 1.9100-1 provides
authority to grant a reasonable extension of time fixed by regulations for the
making of an election or application for tax relief. This topic will explore the
background, procedures and standards applicable to both provisions. Discretionary
relief does not mean arbitrary or capricious decisions. Neither does it result in the
exercise of uncontrolled power by the appropriate Service official. In the context of
IRC 7805(b) and Reg. 1.9100-1, discretion to grant relief is limited by certain
identifiable standards. Relief is sought by exempt organizations in accordance with
specified, published procedures. In all cases, discretion to act is limited and
standardized.
2. Relief under IRC 7805(b)
a. Background
Prior to the Revenue Act of 1921 the Service had no authority to ease any
hardship by prospective application of the correction of a mistake of law. Section
1314 of the Revenue Act of 1921 provided the Commissioner with discretion to
apply reversals of regulations with only prospective effect. Section 506 of the
Revenue Act of 1934 permitted Internal Revenue rulings as well as regulations or
Treasury Decisions to be applied without retroactive effect. During this time, and
prior to 1954, no standards had been published or established with respect to the
application of nonretroactive relief to rulings. Cases were considered on a case-by-
case basis. Rev. Rul. 54-172, 1954-1 C.B. 134, set forth for the first time the
authority, policy, and procedures in issuing rulings to taxpayers and the effect of
such rulings. Since 1954 the general standards for applying 7805(b) relief have
been restated several times, generally in the form of Revenue Procedures. The
latest restatement for the Assistant Commissioner (Employee Plans and Exempt
Organizations) can be found in Rev. Proc. 80-24, 1980-1 C.B. 658.
b. Procedures for Requesting Relief
An exempt organization that desires relief under IRC 7805(b) must submit a
request for a ruling to limit the retroactive effect of revocation or modification of a
ruling letter. The requirements for requesting a ruling in general are set forth in
section 6 of Rev. Proc. 80-24. As in the case of all ruling requests, a request for
relief under IRC 7805(b) must contain a statement of the relief sought together
with an explanation of the reasons and arguments in support of the relief requested.
The exempt organization should submit a substantive discussion of 7805(b)
standards as they relate to its situation. The request for relief may be made in
conjunction with a pending ruling request, or it may be made separately. In either
instance, a conference to discuss the matter will be afforded the organization where
an adverse position is indicated. If the organization's request for relief is made
initially, or as part of a pending ruling request, or is made before the conference of
right on the substantive issues, the 7805(b) issue will be discussed at the
organization's conference of right. The organization also has a right to a conference
when the 7805(b) issue arises as part of a technical advice request. This would
occur when the key District Director proposes to revoke or modify a determination
letter. The organization could request the key District Director to limit the
modification or revocation of the determination letter by requesting the key District
Director to seek technical advice from the National Office. All cases in which
relief under IRC 7805(b) is either recommended by the key District Director or the
Appeals Office, or is requested by the organization, must be referred to the
National Office. See IRM 7(10)(12)6.1(3). Such referral is required because
District Directors generally do not have authority to exercise 7805(b) relief except
with regard to certain employee plans determinations. Such authority rests in the
hands of the Commissioner, the Assistant Commissioner, or the Deputy Assistant
Commissioner. When the key District Director requests technical advice on a
7805(b) issue, the exempt organization must submit the same information as that
specified for ruling requests.
c. Standards for Granting 7805(b) Relief
In general, a ruling may be revoked or modified at any time. If a ruling is
revoked, revocation applies to all open years under the statutes unless the
Commissioner, the Assistant Commissioner, or Deputy Assistant Commissioner
exercises discretionary authority under IRC 7805(b) to limit the retroactive effect
of the revocation or modification. Section 13.04 of Rev. Proc. 80-24 sets forth the
following situations that would affect the modification or revocation of a ruling:
(1) a notice to the taxpayer to whom the ruling originally was
issued;
(2) enactment of legislation or ratification of a tax treaty;
(3) a decision of the United States Supreme Court;
(4) issuance of temporary or final regulations; or,
(5) issuance of a revenue ruling, a revenue procedure, or other
statement published in the Internal Revenue bulletin.
Section 13.05 of Rev. Proc. 80-24 contains the most important aspects of
7805(b) relief. The following statement is at the heart of each 7805(b) decision
made:
"Except in rare or unusual circumstances, the revocation or
modification of a ruling will not be applied retroactively with
respect to the taxpayer to whom the ruling was originally issued
or to a taxpayer whose tax liability was directly involved in
such ruling, if:
(1) there has been no misstatement or omission of material
facts,
(2) the facts subsequently developed are not materially
different from the facts on which the ruling was based,
(3) there has been no change in the applicable law,
(4) the ruling was originally issued with respect to a
prospective or proposed transaction, and
(5) the taxpayer directly involved in the ruling acted in good
faith in reliance upon the ruling and the retroactive
revocation would be to the taxpayer's detriment."
In summary form, this is a classic statement of standards applicable to
equitable relief. The notions of "clean hands," good faith, material change, and
detrimental reliance are all set forth in the Revenue Procedure. In practice, where
there has been no change in the applicable law, an exempt organization that tells
the truth, acts in good faith, and relies on its ruling will be granted discretionary
relief under IRC 7805(b). It should be noted that an exempt organization, like any
other taxpayer, may not rely on a ruling issued to another organization. Further, a
ruling issued to an organization with respect to a particular transaction represents
Service position on that transaction only. Regarding continuing actions or a series
of actions, if a ruling is issued covering such a situation and it is determined that
the ruling was in error or no longer reflects Service position, the Assistant
Commissioner ordinarily will limit retroactivity of the revocation or modification
to a date not earlier than that on which the original ruling is modified or revoked.
What this provides is true prospective application of a Service position and
generally complete protection for the organization to which the ruling was issued.
In like manner, retroactivity of the revocation or modification of a ruling or
determination letter recognizing exemption will ordinarily be limited to a date not
earlier than that on which the original ruling or determination letter is modified or
revoked. See. Rev. Proc. 80-25, 1980-1 C.B. 667, section 13.01. Thus, the same
protection is available on a prospective basis where an organization's exemption is
being revoked or modified.
3. 1.9100-1 Relief
a. Background
Under Reg. 1.9100-1 the Commissioner has discretion, upon a showing of
good cause by a taxpayer, to grant a reasonable extension of the time fixed by the
regulations for making an election or application for relief in respect to income tax
provided:
(1) the time for making the election or application is not
expressly prescribed by the statute;
(2) the request for the extension is filed with the Commissioner
within a period of time the Commissioner considers
reasonable under the circumstances; and,
(3) it is shown to the Commissioner's satisfaction that granting
the extension will not jeopardize the Government's
interests.
The concept of 1.9100-1 relief in the exempt organizations area is a
relatively recent phenomenon. However, such relief has been available for some
time in other areas of tax administration. For example, Technical Information
Release 336, dated September 18, 1961, and Rev. Proc. 61-30, 1961-2 C.B. 568,
provide that the Service will consider requests for granting extensions of time for
the filing of consents by certain shareholders who failed to file timely consents to
elections by small business corporations under IRC 1372. Other areas have also
been the subject of 1.9100-1 relief.
In 1980, the question presented was whether Reg. 1.9100-1 had any
applicability to the area of Reg. 1.508-1. IRC 508(a) provides generally that
organizations organized after October 9, 1969, shall not be treated as organizations
described in IRC 501(c)(3) unless they give notice to the Secretary that they are
applying for recognition of IRC 501(c)(3) status. Reg. 1.508-1(a)(2)(i) provides
that the required "notice" consists of a "properly completed and executed Form
1023, Exemption Application," filed within 15 months from the end of the month
in which the organization was organized. This regulation also provides that a
request for an extension of time to file the notice should be submitted to the
District Director, and that such request would be approved if it is demonstrated that
additional time is required. Organizations that apply for exemption under IRC
501(c)(3) and do not meet any of the exceptions of IRC 508(c), are granted
prospective exemption from the date their Application for Exemption was
submitted, rather than from their date of formation. The key question became
whether the notice and filing requirements of IRC 508 and Reg. 1.508-1(a)(2)(i)
constitute either an "election" or "application for relief in respect of tax" within the
meaning of Reg. 1.9100-1.
Because the 508 notice requirements do not involve any sort of choice or
alternative for an exempt organization, it was decided that no "election" was
present here. However, it was also decided that the 508 notice requirements do
constitute an "application for relief in respect of tax," and therefore Reg. 1.9100-1
is applicable in these instances. Thus, Reg. 1.9100-1 relief may be granted to
organizations that file late if the other requirements of Reg. 1.9100-1 are satisfied.
If those requirements are satisfied, then an extension of time under Reg. 1.9100-1
may be appropriate if good cause is shown and the Commissioner, in his
discretion, believes relief is warranted.
b. Procedures for Requesting Relief
The general statement of procedures with regard to applications for
recognition of exemption under IRC 501 is found in Rev. Proc. 80-25, 1980-1 C.B.
667. However, this Revenue Procedure does not contain the latest thinking with
respect to IRC 508 and Reg. 1.9100-1. A number of possibilities are available to an
organization that submits its application for exemption beyond the requisite 15
month period of Reg. 1.508-1(a)(2)(i). The organization may choose to accept
prospective exemption from the date it submitted its Application Form 1023.
However, this may result in tax being due for prior years during which the
organization was not exempt, FICA and FUTA problems, and lack of deductibility
for donors. If the organization's only problem is exemption from income tax, it
may accept prospective exemption under IRC 501(c)(3), and submit an Application
Form 1024 requesting exemption under IRC 501(c)(4) for prior years. Rev. Rul.
80-108, 1980-1 C.B. 119, holds that an organization that otherwise qualifies for
exemption under both IRC 501(c)(3) and 501(c)(4), but that did not file for
recognition of exemption under IRC 501(c)(3) within the requisite 15 months may
be exempt under IRC 501(c)(4) from the date of its inception. This would be a
good approach for organizations having no problems with respect to FICA and
FUTA, or deductibility of contributions. Organizations that need retroactive
exemption under IRC 501(c)(3) may now request relief under Reg. 1.9100-1.
Rev. Rul. 80-259, 1980-2 C.B. 192, discusses a situation in which an
organization met one of the exceptions of IRC 508(c) during its first three taxable
years. At the end of the Rev. Rul., it was publicly stated for the first time that the
Service will consider applying Reg. 1.9100-1 relief to extend the time for
satisfying the notice requirement of IRC 508(a).
The requirements for requesting an extension of time for submitting an
application are contained in Rev. Proc. 79-63, 1979-2 C.B. 578. An exempt
organization requesting such an extension should submit a substantive discussion
of the 1.9100-1 standards as they relate to its situation. Section 4.02 of Rev. Proc.
79-63 provides that the information submitted should include a chronological
account of the events leading to the failure to make the application. The
information should also include the names and current addresses of each person
having knowledge or information about the events that led to the failure to make a
timely application and all relevant documents. Any other information bearing on
the request may be submitted. Requests for extensions of time under Reg. 1.9100-1
and any additional information must be accompanied by the following declaration:
"Under penalties of perjury, I declare that I have examined this
request, including accompanying documents, and to the best of
my knowledge and belief, the facts presented in support of this
request are true, correct and complete."
This declaration must be signed by an officer of the exempt organization who has
knowledge of the facts, and not by an authorized representative. Supporting
affidavits by an authorized representative or other person must also be
accompanied by a comparable declaration.
Requests for extensions of time for filing must be submitted to the Assistant
Commissioner (Employee Plans and Exempt Organizations). Although authority to
exercise discretionary relief under Reg. 1.9100-1 is vested in the Commissioner,
such authority was redelegated to Division Directors by Delegation Order 183,
dated June 23, 1980, and Assistant Commissioner (EP/EO) Delegation Order 14,
dated August 13, 1980. If a request for an extension under Reg. 1.9100-1 is
received by a key District Director or an Appeals Office, technical advice should
be requested of the National Office. All cases in which relief under Reg. 1.9100-1
is requested must be referred to the National Office. The Manual is being updated
to reflect this. When a 1.9100-1 case takes the form of a technical advice request,
the exempt organization must submit the same information as that specified for
direct requests. It should be noted that in the event an adverse position is indicated,
the organization will be afforded the right to a conference in the National Office.
c. Standards for Granting 1.9100-1 Relief
Once a request for section 1.9100-1 relief is received, it is reviewed for
completeness, including the required declaration and other information. A
memorandum is prepared from the Chief, Exempt Organizations Technical Branch
to the Director, Exempt Organizations Division, discussing the issue, facts, law,
arguments for and against relief, and a recommendation including the precise time
period for which 1.9100-1 relief is to be granted. Although all relevant facts are
considered in deciding whether an extension of time for filing an application is
warranted, the five factors of Rev. Proc. 79-63 are most important. Section 4.01 of
Rev. Proc. 79-63 are most important. Section 4.01 of Rev. Proc. 79-63 contains the
following specific standards governing 1.9100-1 relief:
(1) Due diligence of the taxpayer
What action, if any, did the taxpayer take to determine
the existence of and requirements for the election or
application? In this regard, did the taxpayer consult an
attorney or accountant knowledgeable in tax matters or
communicate with a responsible employee of the
Service? Further, what action, if any, did the taxpayer
take to make the election or application?
(2) Prompt action by the taxpayer
Is the taxpayer requesting the extension within a
reasonable time after discovering a deadline that could
not be met or, alternatively, within a reasonable time
after discovering a deadline that has already passed? Was
the discovery made within a reasonable time after
passage of the deadline? Did the taxpayer take reasonable
action under all the circumstances to deal promptly with
a missed deadline?
(3) Intent of the taxpayer
Did the taxpayer intend to make the election or
application on time? If the taxpayer knew of the election
or application, was the taxpayer's failure to elect or apply
on time due to mere inadvertence or to significant
intervening circumstance beyond the taxpayer's control?
Have the taxpayer's actions been consistent with the
intent to make the particular election or application, or
has the taxpayer taken action inconsistent with the intent
to make the particular election or application?
(4) Prejudice to the interests of the Government
Would granting the extension neither prejudice the
interests of the Government nor cause undue
administrative burden? For example, has the taxpayer
used or had the opportunity to use hindsight to the
Government's prejudice by actions based on knowledge
of events occurring after the time when the taxpayer
would have had to act in order timely to make the
election or application?
(5) Statutory and regulatory objectives
Would granting the extension be consistent with the
objectives of the underlying statute and the regulatory
election or application provision?
The Application of these standards to a simple situation is as follows: A
charitable organization places its Application Form 1023 in the hands of a
knowledgeable attorney or accountant who agrees to submit the Application within
the requisite 15 month period, but fails to do so. As soon as the organization
discovers that no application for exemption has been submitted and that the 15
month period has passed, it promptly submits its Application Form 1023, and
requests relief under Reg. 1.9100-1. All of the facts indicate that the organization
had always intended to be exempt under IRC 501(c)(3). There is no reason why
granting such relief would prejudice the Government or cause undue
administrative burden. Finally, the "notice" requirements of IRC 508 would not be
frustrated since the organization had done all that was reasonably necessary to
provide notice within the prescribed time. Under the circumstances relief under
Reg. 1.9100-1 would be appropriate, and the organization's exempt status under
IRC 501(c)(3) would be retroactive to its date of formation. It should be noted that
this is a rather uncomplicated example of a 1.9100-1 case. Other facts and
circumstances unfavorable to the organization might preclude relief under Reg.
1.9100-1, for example if the organization were dilatory in acquiring the services of
an attorney so that he or she does not have adequate time to prepare the
application, an adverse ruling might be warranted.